There has been a lot of chatter in the media recently that another economic downturn might be around the corner. As The Wow Company found in their recent “How recession-proof is your business” survey, a surprisingly high number of UK-based businesses are not prepared for the next recession.
If the next recession is coming, many businesses are in a precarious position. Peter Czapp, cofounder of The Wow Company, explains: “Many owners are just one bit of bad news away from going out of business completely”. In fact, 15% of business owners in the recent survey admitted that they only have enough cash to cover one month of overheads should anything go awry.
Ways to prepare yourself for the next recession
There are several key steps you can take to put your firm in a better position to face the next financial crisis, should there be a recession in 2018.
Move your clients to direct debit
Surprisingly, a strong majority of small businesses in the UK still rely on cheques and bank transfers to get paid. Only 27% of respondents use more reliable direct debits to get paid for their work.
We’d recommend using a direct debit tool such as Gocardless to automatically take payments, meaning there’s no chance of getting paid late. Gocardless helps businesses get paid on average 20 days quicker than other methods.
Tools like Gocardless can be especially useful for recurring payments. Taking direct debits can improve cash flow, and requires little to no admin time to set up.
Shorten your payment terms
The good news is that SMEs are getting paid faster than ever before. On average, businesses are now getting paid in 27 days.
However, you can reduce this delay further. The Wow Company’s report found that businesses with 7 day payment terms get paid in 17 days on average, while those with 30 day payment terms tend to get paid in 35 days.
Reducing your payment terms is a solid first step to collecting cash more quickly, helping you fill cash flow gaps and stay in the black. You may worry that this could upset existing clients – don’t. They’ll understand if you explain the reasoning.
Be upfront with your clients when agreeing fees. Set out your payment terms and ask them if they intend to pay you on time. A simple handshake could get you paid much faster.
For clients who are still paying through bank transfer or cheque, you’ll need an invoice chasing process in place. If you don’t automate this, it’s likely to take a heck of a lot of admin time. If you’d like to streamline this process, we’d recommend looking into an app like Chaser for Xero.
Monitor and forecast your cash flow
What really rings alarm bells with a potential economic recession on its way is the lack of insight the respondents have into their cash.
22% of respondents don’t have a cash flow forecast, and half of those don’t feel they need one.
65% of small businesses have cash reserves of 3 months or less – putting them in a precarious position if they lose even one client.
More worryingly, 15% of business owners are living on the edge of delving into their personal finances to stay afloat. These businesses are in a very precarious position if the next recession is on its way.
The first step towards resolving these issues is creating and maintaining a cash flow forecast. This used to be an extremely time consuming and manual task, but now it can be incredibly easy to do with cloud-based tools such as Float. Float integrates with accounting software providers including Xero, QuickBooks and FreeAgent to automatically import open and paid invoices and bills to track your progress.
Float uses the direct method of cash flow forecasting to show you your current and future cash position in real terms.
Consider alternative finance
The Wow Company found that 53% of SMEs are using some sort of external finance. 28% of business owners were forced to use personal funds to tide their business over in the past 12 months.
If your go-to source of cash injection is a bank loan, think again. There are many alternative finance options available to businesses including invoice financing, peer to peer lending, and even crowdfunding. Providers such as Market Invoice, ShareIn, and Lending Crowd are changing this space.
Alternative finance is any type of funding not provided by a traditional institution such as a high street bank. Traditional finance can work for many businesses, but banks often have criteria that smaller businesses can’t meet, causing them to look for other options.
Alternative finance is about securing finance directly, without requiring a large institution to serve as a broker. If the next recession is on the horizon, alternative finance could be a lifeline.
Diversify your client portfolio and measure satisfaction
If one client makes up 30% or more of your revenue, this poses a significant risk to your business. Of course it’s hard, but looking for smaller projects from smaller players can help you shift some of your eggs from that one rather precarious basket.
To reduce your risk of losing a crucial client, it’s important to track their customer satisfaction. Surprisingly, 67% of survey respondents don’t track customer satisfaction at all. If you don’t know how your customers feel about your service or product, you might be left blindsided when an unhappy client leaves you. Especially if they’re essential to your monthly revenue.
A really simple way to track customer satisfaction is through measuring your Net Promoter Score (NPS) at least twice a year. NPS is a globally recognised indicator of customer happiness that asks one simple question – “On a scale of 1-10, how likely are you to recommend [company] to a friend or colleague?”
An answer of 6 or below detracts from your score, a 7 or 8 doesn’t affect your score, and answers of 9 or 10 will increase your score.
You’ll be able to benchmark your NPS compared to well known brands, and get feedback from customers about how to improve.
Move to a recurring revenue model
If you work on a project by project basis, you’ll know how hard it can be to continuously generate enough revenue to sustain your business and pay the bills. It can mean you have to routinely lay staff off after a big project, which can lead to a volatile employee culture. And if the next recession is around the corner, you could be one fallen-through project from disaster.
The priority should be “transitioning one-off engagements into client relationships which produce recurring revenue. This immediately has positive knock-on effects elsewhere in the business: it smoothes out the feast-or-famine cash flow cycle endemic to consulting, allowing you to invest confidently in things which grow the business, like onboarding new employees or moving your practice into more lucrative directions,” says Patrick McKenzie, entrepreneur and Principal at Kalzumeus Software.
Setting up recurring revenue plans can increase customer loyalty, and bring stability to your business. It will help you recruit and keep good people, and confidently plan for the future.